Costco's Dividend Tax Epiphany

When President Obama needed a business executive
to come to his campaign defense, Jim Sinegal was there. The Costco
co-founder, director and former CEO even made a prime-time speech at the Democratic
Party convention in Charlotte.
So what a surprise this week to see that Mr. Sinegal and the rest of the Costco
board voted to give themselves a special dividend to avoid Mr. Obama's looming
tax increase. Is this what the President means by "tax fairness"?

Specifically, the giant retailer announced
Wednesday that the company will pay a special dividend of $7 a share this
month. That's a $3 billion Christmas gift for shareholders that will let them
be taxed at the current dividend rate of 15%, rather than next year's rate of
up to 43.4%—an increase to 39.6% as the Bush-era rates expire plus another 3.8%
from the new ObamaCare surcharge.

Shareholders were happy as they bid up shares by
more than 5% in two days. But the rating agencies were less thrilled, as Fitch
downgraded Costco's credit to A+ from AA-. Standard & Poor's had been
watching the company for a potential upgrade but pulled the watch on the
borrowing news.

We think companies can do what they want with
their cash, but it's certainly rare to see a public corporation weaken its
balance sheet not for investment in the future but to make a one-time equity
payout. It's a good illustration of the way that Federal Reserve Chairman Ben
Bernanke's near-zero interest rates are combining with federal tax policy to
distort business decisions.

One of the biggest dividend winners will be none
other than Mr. Sinegal, who owns about two million shares, while his wife owns
another 84,669. At $7 a share, the former CEO will take home roughly $14
million. At a 15% tax rate he'll get to keep nearly $12 million of that
windfall, while at next year's rate of 43.4% he'd take home only about $8
million. That's a lot of extra cannoli.

This isn't exactly the tone of, er, shared
sacrifice that Mr. Sinegal struck on stage in Charlotte. He described Mr. Obama as "a
President making an economy built to last," adding that "for
companies like Costco to invest, grow, hire and flourish, the conditions have
to be right. That requires something from all of us." But apparently $4
million less from Mr. Sinegal.

By the way, the Costco board also includes at
least two other prominent tub-thumpers for higher taxes— William Gates Sr. and
Charles Munger. Mr. Gates, the father of Microsoft's
MSFT-0.96%Bill Gates, has campaigned against
repealing the death tax and led the fight to impose an income tax via
referendum in Washington state in 2010. It lost. Mr. Munger is Warren Buffett's
longtime Sancho Panza at Berkshire
HathawayBRKB-0.07%and
has spoken approvingly of a value-added tax that would stick it to the middle
class.

Costco's chief financial
officer, Richard Galanti, confirms that every member of the board is also a
shareholder. Based on the most recent publicly available data, they own more
than 4.1 million shares and more than 1.3 million options to purchase
additional shares. At $7 a share, the dividend will distribute roughly $29
million to the board, including Mr. Sinegal's $14 million—at a collective tax
saving of about $8 million. Even more cannoli.

We emailed Mr. Sinegal
for comment but didn't hear back. Mr. Galanti explained that while looming tax
hikes are a factor in the December borrowing and payout, so are current low
interest rates. Mr. Galanti adds that the company will still have a strong
balance sheet and is increasing its capital expenditures and store openings
this year.

As it happens, one of those new stores opened
Thursday in Washington, D.C., and no less a political star than Joe Biden
stopped by to join Mr. Sinegal and pose for photos as he did some Christmas
shopping. It's nice to have friends in high places. We don't know if Mr. Biden
is a Costco shareholder, but if he wants to get in on the special dividend
there's still time before his confiscatory tax policy hits. The dividend is
payable on December 18 to holders of record on December 10.

To sum up: Here we have people at the very top
of the top 1% who preach about tax fairness voting to write themselves a huge
dividend check to avoid the Obama tax increase they claim it is a public
service to impose on middle-class Americans who work for 30 years and finally
make $250,000 for a brief window in time.

If they had any shame, they'd send their entire
windfall to the Treasury.

A version of this
article appeared November 30, 2012, on page A14 in the U.S. edition of
The Wall Street Journal, with the headline: Costco's Dividend Tax Epiphany.